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Can the Saudis Keep Oil From Skyrocketing?

With an important part of our world in chaos, is Saudi Arabia next in line?

Despite incessantly shocking news from the Middle East, by far the most significant questions about the region remain unanswered.

This pair of unknowable queries consists simply of: (1) Where are crude prices likely heading? and (2) Will Saudi Arabia escape the fate of its neighbors? Japan's Nomura Holdings(NYSE: NMR) took a shot at the oil price conundrum on Wednesday and arrived at the conclusion that, with production halted in Libya and Algeria -- the Saudis were not part of the equation -- crude may head for $220 a barrel.

Obviously, Nomura's conclusion is based upon a total shutdown of production in the two countries. Included would be European producers Eni(NYSE: E) and Total(NYSE: TOT) -- which admittedly have begun to tap their production brakes -- along with the U.S. contingent that includes Marathon Oil(NYSE: MRO) and ConocoPhillips(NYSE: COP). But $220?

Foolish wisdomActually, my Foolish colleague Morgan Housel yesterday sensibly described why crude prices won't reach $220 a barrel, or anything close to that stratospheric level: They can't. After all, as he sagaciously noted, we only need to hearken back to 2008, when puncturing the $140 level unleashed predictions of $250 a barrel and higher from a host of hydrocarbon prophets.

But it also caused folks to suddenly and meaningfully put the kibosh on most discretionary spending. The result was that crude prices rolled over, and with an added nudge from a hammering of the housing sector, the Great Recession was born.

We can't yet know how the emerging 2011 scenario will play out. After all, China single-handedly added a million barrels of daily demand in 2010. So if a few million barrels a day are subtracted from global production, the supply-demand nexus will be more complicated than it was the last time we trod this way.

Nevertheless, if the turmoil in the Middle East and North Africa remains, crude could hit nosebleed levels of, say, $160 or $175 for a time, but then they'd likely return to those thrilling days of yesteryear -- 2008, to be precise. At that point, the economy would go down for a second time, probably further than before, and crude prices would re-enact their previous descent, although perhaps not to $30 a barrel.

The crucial SaudisHowever, much of this depends on how the biggest oil producer of them all, Saudi Arabia, is affected by the region's travails. That's a far tougher call. I'm compelled to look again to an opinion piece from The Wall Street Journal that I touted last week. Written by Karen Elliott House, a former Journal executive and award-winning reporter, it bore the headline "From Tunis to Cairo to Riyadh." It presages a book she's writing on Saudi society.

One of the article's key themes involves the simultaneous pervasiveness and decline of the kingdom's royal family. As she says:

Over the years, the royal family -- now numbering nearly 7,000 princes -- has come to pervade every corner of Saudi life, but it has lost public respect in the process. Almost every Saudi business, key ministry and mayoralty is headed or figure-headed by a prince. A royal family that once was relatively unified when decisions were made by a handful of senior brothers now is so large and fractured that different branches pursue conflicting agendas.

On that basis alone, the Saudis resemble their neighbors who lately have been beset by demonstrations: Despotic rulers (although nowhere else does the number approach four figures) who have reigned seemingly forever are suddenly being challenged by their downtrodden subjects.

Wahhabi powerIn most cases, a Sunni minority has for many years lorded over a disadvantaged Shiite majority. That, however, is not precisely the case in Saudi Arabia. There, the royal family, along with its majority Sunni subjects (including the military), are largely made up of adherents to Islam's strict Wahhabism sect. Shiites number only about a million, or about 5%, of the country's population of 18 million.

And then there's the family's untold wealth, which, in dicey times like the present, permits it to dispense benefits to the citizenry. Indeed, King Abdullah recently returned from three months of medical treatment in the U.S. and Morocco. Upon his arrival, he immediately bestowed an estimated $37 billion largesse on his subjects.

Nevertheless, while the likes of Chevron(NYSE: CVX) and Schlumberger(NYSE: SLB) are uninterrupted in helping to keep Saudi Arabia's vast oil reserves flowing, there are a couple of ominous circumstance I'm inclined to watch carefully. The first involves the potential for a spillover from the country's proximity to Bahrain, from which it is separated by only a 15-mile causeway, and whose Sunni rulers have contended with an uprising by an unhappy Shia majority.

And then there is March 11, a day that hundreds of put-upon Saudis are endorsing on Facebook as a "day of rage." How the event will turn out is anyone's guess, but it portends activities that kicked off demonstrations in Egypt, Bahrain, and Yemen.

The bottom lineSo we'll await answers to the two vital questions emerging from our suddenly chaotic world. In the meantime, each day it becomes more obvious that energy companies should not be ignored by Foolish investors.